What is a short squeeze? A phenomenon that causes a surge in the market.

A short squeeze refers to a situation where asset prices unexpectedly rise, prompting many traders who had taken short positions to simultaneously take actions to avoid losses. This phenomenon can have a significant impact on the market and may lead to a sharp increase in prices.

short squeeze mechanism

Short selling traders typically take positions anticipating a decline in asset prices. However, as prices begin to rise, these positions start to accumulate losses. If the price rise continues, traders may be forced to close their positions for reasons such as the following:

1. Activation of stop-loss order
2. Forced liquidation in margin trading and futures contracts
3. Voluntary settlement to avoid further losses

Price Rise Spiral

To close a Short Position, traders need to buy back the asset. When this buyback occurs intensively, it triggers a chain reaction that causes further price rises, leading more short selling traders to rush to close their positions. As a result, prices tend to rise sharply, and trading volume also tends to increase simultaneously.

short squeeze scale

The larger the total amount of short selling positions in the market, the greater the potential impact of a short squeeze. In other words, the more liquidity that is “squeezed out”, the greater the tendency for price fluctuations to widen. This process can be said to have the effect of temporarily increasing demand and decreasing supply.

Opposite Phenomenon: Long Squeeze

On the opposite side of a short squeeze is a long squeeze, which is a somewhat rare phenomenon. A long squeeze refers to a situation where traders holding long positions are caught in a chain reaction of selling pressure, leading to a sharp decline in prices.

Gate monitors market movements like these and provides tools and information to support user trading. However, due to the high risks associated with sudden price fluctuations, it is essential to exercise caution when trading.